India recaps public sector banks
Recapitalization bonds will repair balance sheets; next step will be writing off bad loans
It is rare that a decision to plough billions of dollars of public money into weak banks is accompanied by an international ratings agency upgrade, but that is what happened in India recently.
On October 24, the government announced Rp2.11 trillion ($34.2 billion) of bank recapitalization measures for public-sector banks over the next two years. And on November 17, Moody’s upgraded the country from Baa3 to Baa2 – a notch above investment grade – for the first time in 14 years.
Moody’s did so because it appears to believe in prime minister Narendra Modi’s reform agenda, of which the recapitalization drive is a part.
Moody’s said the upgrade rests upon an expectation “that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term”.
The public sector recapitalization is only a part of that broader agenda – other elements include the introduction of a goods and services tax, improvements to monetary policy, the use of the Aadhaar national card to boost financial inclusion and the controversial demonetization programme of last November – but it has been widely applauded by the market.